Economists have struggled to understand why India’s consumer prices have been rising 10% a year for the past five years when prices in the world have been reasonably steady. Even in poor, emerging economies, prices have risen at half the rate as India’s. Inflation is complex but it has become clear that India’s inflation is the result of the same bad policies that brought down our growth. Huge government spending without commensurate production has meant that too much money has been chasing too few goods.
UPA II put massive funds into villagers’ pockets. Rural wages thus rose an unprecedented 15% a year in the last five years. Farmers received a bonanza — they got high minimum support prices for grains besides fertilizer and energy subsidies plus loan waivers. Rising wages are a good thing when they reflect climbing demand in a prospering economy. To an extent, this is true of India, which experienced a ‘golden age’ of growth and prosperity till 2011. These rising incomes changed the aam family’s food habits — eating fewer cereals and more protein, fruits and vegetables. But escalating rural wages have also been the result of ‘make work’ jobs of NREGA, which did not create productive assets. Had the same money been invested in factories, roads and power plants, prices would not have risen to this extent.
The obvious answer to inflation is to revive economic growth. To its credit, the government has realized its mistake, and is desperately trying to approve projects that have been stuck for years in red and green tape. But investments take time to translate into jobs and growth. There are quicker ways to tame food inflation fortunately. One of them is to scrap ‘agricultural produce marketing committees’ (APMC), which function as wholesaler cartels in mandis rather than protecting small farmers. Like most of our bad economic ideas, this is a hangover from Indira Gandhi’s socialist days.
Freeing wholesale markets will bring competition as traders and farmers are able to buy and sell freely. International retailers will be able to buy directly from farmers, and with their formidable cold-chains, they will also save food from rotting in the fields and mandis. This will result in higher returns to farmers and also lower prices to consumers as supermarkets will pass on the savings from bypassing middlemen. Economists have been urging the scrapping of APMCs for years. Rahul Gandhi has now discovered this idea, and since he has put his weight behind it, it might get implemented in the Congress-ruled states. Powerful local politicians, however, control APMCs — let’s watch if Rahul Gandhi has it in him to take on this powerful vested interest.
The Aam Aadmi Party’s (AAP) first action should have been to scrap the APMC in Azadpur Mandi near Delhi. It would have brought quick relief to consumers by curbing prices of fruits and vegetables. But it did the opposite. AAP scrapped foreign investment in supermarkets, denying aam admi the potential for lower prices. It did not realize that around the world it is the aam admi who shops in supermarkets because of lower prices. Besides, AAP’s aspiring supporters would any day prefer to work in modern supermarkets rather than in kirana stores.
Of our three main political parties, only the Congress seems to have understood that inflation can be controlled by APMC reform and foreign investment in supermarkets. The BJP has chosen the trader against the aam admi and opposes FDI in retail. The AAP’s leadership, oddly enough, does not seem to be in sync with the aspirations of its followers. It is trapped in old ‘povertarian’ ideas of the Old Left which ensured that India remained an underachiever. Given the crucial role that prices will play in the coming election, can the Congress convert its advantage into votes?